---
kind: "section"
citation: "26 U.S.C. § 1563"
title: "26"
title_heading: "Internal Revenue Code"
number: "1563"
heading: "Definitions and special rules"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/1563"
units:
  - "Subtitle A — Income Taxes"
  - "Chapter 6 — Consolidated Returns"
  - "Subchapter B — Related Rules"
  - "Part II — Certain Controlled Corporations"
---

# §1563. Definitions and special rules

- (a) **Controlled group of corporations—** For purposes of this part, the term “[controlled group of corporations](/usc/26/993.md?p=a-3)” means any group of—
  - (1) **Parent-subsidiary controlled group—** One or more chains of corporations connected through [stock](/usc/26/1504.md?p=a-4) ownership with a common [parent corporation](/usc/26/424.md?p=e) if—
    - (A) [stock](/usc/26/1504.md?p=a-4) possessing at least 80 percent of the total combined voting power of all classes of [stock](/usc/26/1504.md?p=a-4) entitled to vote or at least 80 percent of the total [value](/usc/26/851.md?p=c-4) of shares of all classes of [stock](/usc/26/1504.md?p=a-4) of each of the corporations, except the common [parent corporation](/usc/26/424.md?p=e), is owned (within the meaning of [subsection (d)(1)](#d-1)) by one or more of the other corporations; and
    - (B) the common [parent corporation](/usc/26/424.md?p=e) owns (within the meaning of [subsection (d)(1)](#d-1)) [stock](/usc/26/1504.md?p=a-4) possessing at least 80 percent of the total combined voting power of all classes of [stock](/usc/26/1504.md?p=a-4) entitled to vote or at least 80 percent of the total [value](/usc/26/851.md?p=c-4) of shares of all classes of [stock](/usc/26/1504.md?p=a-4) of at least one of the other corporations, excluding, in computing such voting power or [value](/usc/26/851.md?p=c-4), [stock](/usc/26/1504.md?p=a-4) owned directly by such other corporations.
  - (2) **Brother-sister controlled group—** Two or more corporations if 5 or fewer persons who are individuals, [estates](/usc/26/1361.md?p=c-3), or trusts own (within the meaning of [subsection (d)(2)](#d-2)) [stock](/usc/26/1504.md?p=a-4) possessing more than 50 percent of the total combined voting power of all classes of [stock](/usc/26/1504.md?p=a-4) entitled to vote or more than 50 percent of the total [value](/usc/26/851.md?p=c-4) of shares of all classes of [stock](/usc/26/1504.md?p=a-4) of each corporation, taking into account the [stock](/usc/26/1504.md?p=a-4) ownership of each such person only to the extent such [stock](/usc/26/1504.md?p=a-4) ownership is identical with respect to each such corporation.
  - (3) **Combined group—** Three or more corporations each of which is a member of a group of corporations described in paragraph [(1)](#a-1) or [(2)](#a-2), and one of which—
    - (A) is a common [parent corporation](/usc/26/424.md?p=e) included in a group of corporations described in [paragraph (1)](#a-1), and also
    - (B) is included in a group of corporations described in [paragraph (2)](#a-2).
  - (4) **Certain insurance companies—** Two or more insurance [companies](/usc/26/812.md?p=a) subject to taxation under [section 801](/usc/26/801.md) which are members of a [controlled group of corporations](/usc/26/993.md?p=a-3) described in paragraph [(1)](#a-1), [(2)](#a-2), or [(3)](#a-3). Such insurance [companies](/usc/26/812.md?p=a) shall be treated as a [controlled group of corporations](/usc/26/993.md?p=a-3) separate from any other corporations which are members of the [controlled group of corporations](/usc/26/993.md?p=a-3) described in paragraph [(1)](#a-1), [(2)](#a-2), or [(3)](#a-3).
- (b) **Component member—**
  - (1) **General rule—** For purposes of this part, a corporation is a component member of a [controlled group of corporations](/usc/26/993.md?p=a-3) on a December 31 of any taxable year (and with respect to the taxable year which includes such December 31) if such corporation—
    - (A) is a member of such [controlled group of corporations](/usc/26/993.md?p=a-3) on the December 31 included in such year and is not treated as an excluded member under [paragraph (2)](#b-2), or
    - (B) is not a member of such [controlled group of corporations](/usc/26/993.md?p=a-3) on the December 31 included in such year but is treated as an additional member under [paragraph (3)](#b-3).
  - (2) **Excluded members—** A corporation which is a member of a [controlled group of corporations](/usc/26/993.md?p=a-3) on December 31 of any taxable year shall be treated as an excluded member of such group for the taxable year including such December 31 if such corporation—
    - (A) is a member of such group for less than one-half the number of days in such taxable year which precede such December 31,
    - (B) is exempt from taxation under [section 501(a)](/usc/26/501.md?p=a) (except a corporation which is subject to tax on its unrelated business [taxable income](/usc/26/63.md?p=a) under [section 511](/usc/26/511.md)) for such taxable year,
    - (C) is a foreign corporation subject to tax under [section 881](/usc/26/881.md) for such taxable year,
    - (D) is an insurance [company](/usc/26/812.md?p=a) subject to taxation under [section 801](/usc/26/801.md) (other than an insurance [company](/usc/26/812.md?p=a) which is a member of a [controlled group](/usc/26/414.md?p=l-2-D-v) described in [subsection (a)(4)](#a-4)), or
    - (E) is a franchised corporation, as defined in [subsection (f)(4)](#f-4).
  - (3) **Additional members—** A corporation which—
    - (A) was a member of a [controlled group of corporations](/usc/26/993.md?p=a-3) at any time during a calendar year,
    - (B) is not a member of such group on December 31 of such calendar year, and
    - (C) is not described, with respect to such group, in subparagraph [(B)](#b-2-B), [(C)](#b-2-C), [(D)](#b-2-D), or [(E)](#b-2-E) of paragraph (2),

    shall be treated as an additional member of such group on December 31 for its taxable year including such December 31 if it was a member of such group for one-half (or more) of the number of days in such taxable year which precede such December 31.

  - (4) **Overlapping groups—** If a corporation is a component member of more than one [controlled group of corporations](/usc/26/993.md?p=a-3) with respect to any taxable year, such corporation shall be treated as a component member of only one [controlled group](/usc/26/414.md?p=l-2-D-v). The [determination](/usc/26/1313.md?p=a) as to the group of which such corporation is a component member shall be made under regulations prescribed by the Secretary which are consistent with the purposes of this part.
- (c) **Certain stock excluded—**
  - (1) **General rule—** For purposes of this part, the term “[stock](/usc/26/1504.md?p=a-4)” does not include—
    - (A) nonvoting [stock](/usc/26/1504.md?p=a-4) which is limited and preferred as to [dividends](/usc/26/316.md?p=a),
    - (B) treasury [stock](/usc/26/1504.md?p=a-4), and
    - (C) [stock](/usc/26/1504.md?p=a-4) which is treated as “excluded [stock](/usc/26/1504.md?p=a-4)” under [paragraph (2)](#c-2).
  - (2) **Stock treated as “excluded stock”—**
    - (A) **Parent-subsidiary controlled group—** For purposes of [subsection (a)(1)](#a-1), if a corporation (referred to in this paragraph as “[parent corporation](/usc/26/424.md?p=e)”) owns (within the meaning of subsections [(d)(1)](#d-1) and [(e)(4)](#e-4)), 50 percent or more of the total combined voting power of all classes of [stock](/usc/26/1504.md?p=a-4) entitled to vote or 50 percent or more of the total [value](/usc/26/851.md?p=c-4) of shares of all classes of [stock](/usc/26/1504.md?p=a-4) in another corporation (referred to in this paragraph as “[subsidiary corporation](/usc/26/424.md?p=f)”), the following [stock](/usc/26/1504.md?p=a-4) of the [subsidiary corporation](/usc/26/424.md?p=f) shall be treated as excluded [stock](/usc/26/1504.md?p=a-4)—
      - (i) [stock](/usc/26/1504.md?p=a-4) in the [subsidiary corporation](/usc/26/424.md?p=f) held by a trust which is part of a plan of deferred [compensation](/usc/26/414.md?p=n-5-C-iii) for the benefit of the [employees](/usc/26/430.md?p=c-7-D-vi) of the [parent corporation](/usc/26/424.md?p=e) or the [subsidiary corporation](/usc/26/424.md?p=f),
      - (ii) [stock](/usc/26/1504.md?p=a-4) in the [subsidiary corporation](/usc/26/424.md?p=f) owned by an individual (within the meaning of [subsection (d)(2)](#d-2)) who is a principal stockholder or officer of the [parent corporation](/usc/26/424.md?p=e). For purposes of this clause, the term “principal stockholder” of a corporation means an individual who owns (within the meaning of [subsection (d)(2)](#d-2)) 5 percent or more of the total combined voting power of all classes of [stock](/usc/26/1504.md?p=a-4) entitled to vote or 5 percent or more of the total [value](/usc/26/851.md?p=c-4) of shares of all classes of [stock](/usc/26/1504.md?p=a-4) in such corporation,
      - (iii) [stock](/usc/26/1504.md?p=a-4) in the [subsidiary corporation](/usc/26/424.md?p=f) owned (within the meaning of [subsection (d)(2)](#d-2)) by an [employee](/usc/26/430.md?p=c-7-D-vi) of the [subsidiary corporation](/usc/26/424.md?p=f) if such [stock](/usc/26/1504.md?p=a-4) is subject to conditions which run in favor of such parent (or subsidiary) corporation and which substantially restrict or limit the [employee](/usc/26/430.md?p=c-7-D-vi)’s right (or if the [employee](/usc/26/430.md?p=c-7-D-vi) constructively owns such [stock](/usc/26/1504.md?p=a-4), the direct owner’s right) to dispose of such [stock](/usc/26/1504.md?p=a-4), or
      - (iv) [stock](/usc/26/1504.md?p=a-4) in the [subsidiary corporation](/usc/26/424.md?p=f) owned (within the meaning of [subsection (d)(2)](#d-2)) by an [organization](/usc/26/414.md?p=m-6-A) (other than the [parent corporation](/usc/26/424.md?p=e)) to which [section 501](/usc/26/501.md) (relating to certain educational and charitable [organizations](/usc/26/414.md?p=m-6-A) which are exempt from tax) applies and which is controlled directly or [indirectly](/usc/26/101.md?p=a-3-B) by the [parent corporation](/usc/26/424.md?p=e) or [subsidiary corporation](/usc/26/424.md?p=f), by an individual, [estate](/usc/26/1361.md?p=c-3), or trust that is a [principal stockholder](#c-2-A-ii) (within the meaning of [clause (ii)](#c-2-A-ii)) of the [parent corporation](/usc/26/424.md?p=e), by an officer of the [parent corporation](/usc/26/424.md?p=e), or by any combination thereof.
    - (B) **Brother-sister controlled group—** For purposes of [subsection (a)(2)](#a-2), if 5 or fewer persons who are individuals, [estates](/usc/26/1361.md?p=c-3), or trusts (referred to in this subparagraph as “common owners”) own (within the meaning of [subsection (d)(2)](#d-2)), 50 percent or more of the total combined voting power of all classes of [stock](/usc/26/1504.md?p=a-4) entitled to vote or 50 percent or more of the total [value](/usc/26/851.md?p=c-4) of shares of all classes of [stock](/usc/26/1504.md?p=a-4) in a corporation, the following [stock](/usc/26/1504.md?p=a-4) of such corporation shall be treated as excluded [stock](/usc/26/1504.md?p=a-4)—
      - (i) [stock](/usc/26/1504.md?p=a-4) in such corporation held by an [employees](/usc/26/430.md?p=c-7-D-vi)’ trust described in [section 401(a)](/usc/26/401.md?p=a) which is exempt from tax under [section 501(a)](/usc/26/501.md?p=a), if such trust is for the benefit of the [employees](/usc/26/430.md?p=c-7-D-vi) of such corporation,
      - (ii) [stock](/usc/26/1504.md?p=a-4) in such corporation owned (within the meaning of [subsection (d)(2)](#d-2)) by an [employee](/usc/26/430.md?p=c-7-D-vi) of the corporation if such [stock](/usc/26/1504.md?p=a-4) is subject to conditions which run in favor of any of such common owners (or such corporation) and which substantially restrict or limit the [employee](/usc/26/430.md?p=c-7-D-vi)’s right (or if the [employee](/usc/26/430.md?p=c-7-D-vi) constructively owns such [stock](/usc/26/1504.md?p=a-4), the direct owner’s right) to dispose of such [stock](/usc/26/1504.md?p=a-4). If a condition which limits or restricts the [employee](/usc/26/430.md?p=c-7-D-vi)’s right (or the direct owner’s right) to dispose of such [stock](/usc/26/1504.md?p=a-4) also applies to the [stock](/usc/26/1504.md?p=a-4) held by any of the common owners pursuant to a bona fide reciprocal [stock](/usc/26/1504.md?p=a-4) [purchase](/usc/26/1361.md?p=e-1-C) arrangement, such condition shall not be treated as one which restricts or limits the [employee](/usc/26/430.md?p=c-7-D-vi)’s right to dispose of such [stock](/usc/26/1504.md?p=a-4), or
      - (iii) [stock](/usc/26/1504.md?p=a-4) in such corporation owned (within the meaning of [subsection (d)(2)](#d-2)) by an [organization](/usc/26/414.md?p=m-6-A) to which [section 501](/usc/26/501.md) (relating to certain educational and charitable [organizations](/usc/26/414.md?p=m-6-A) which are exempt from tax) applies and which is controlled directly or [indirectly](/usc/26/101.md?p=a-3-B) by such corporation, by an individual, [estate](/usc/26/1361.md?p=c-3), or trust that is a [principal stockholder](#c-2-A-ii) (within the meaning of [subparagraph (A)(ii)](#c-2-A-ii)) of such corporation, by an officer of such corporation, or by any combination thereof.
- (d) **Rules for determining stock ownership—**
  - (1) **Parent-subsidiary controlled group—** For purposes of determining whether a corporation is a member of a parent-subsidiary [controlled group of corporations](/usc/26/993.md?p=a-3) (within the meaning of [subsection (a)(1)](#a-1)), [stock](/usc/26/1504.md?p=a-4) owned by a corporation means—
    - (A) [stock](/usc/26/1504.md?p=a-4) owned directly by such corporation, and
    - (B) [stock](/usc/26/1504.md?p=a-4) owned with the application of paragraphs [(1)](#e-1), [(2)](#e-2), and [(3)](#e-3) of subsection (e).
  - (2) **Brother-sister controlled group—** For purposes of determining whether a corporation is a member of a [brother](/usc/26/152.md?p=f-4)-[sister](/usc/26/152.md?p=f-4) [controlled group of corporations](/usc/26/993.md?p=a-3) (within the meaning of [subsection (a)(2)](#a-2)), [stock](/usc/26/1504.md?p=a-4) owned by a person who is an individual, [estate](/usc/26/1361.md?p=c-3), or trust means—
    - (A) [stock](/usc/26/1504.md?p=a-4) owned directly by such person, and
    - (B) [stock](/usc/26/1504.md?p=a-4) owned with the application of [subsection (e)](#e).
- (e) **Constructive ownership—**
  - (1) **Options—** If any person has an option to acquire [stock](/usc/26/1504.md?p=a-4), such [stock](/usc/26/1504.md?p=a-4) shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such [stock](/usc/26/1504.md?p=a-4).
  - (2) **Attribution from partnerships—** [Stock](/usc/26/1504.md?p=a-4) owned, directly or [indirectly](/usc/26/101.md?p=a-3-B), by or for a [partnership](/usc/26/761.md?p=a) shall be considered as owned by any [partner](/usc/26/761.md?p=b) having an [interest](/usc/26/856.md?p=f-1) of 5 percent or more in either the capital or profits of the [partnership](/usc/26/761.md?p=a) in proportion to his [interest](/usc/26/856.md?p=f-1) in capital or profits, whichever such proportion is the greater.
  - (3) **Attribution from estates or trusts—**
    - (A) [Stock](/usc/26/1504.md?p=a-4) owned, directly or [indirectly](/usc/26/101.md?p=a-3-B), by or for an [estate](/usc/26/1361.md?p=c-3) or trust shall be considered as owned by any beneficiary who has an actuarial [interest](/usc/26/856.md?p=f-1) of 5 percent or more in such [stock](/usc/26/1504.md?p=a-4), to the extent of such actuarial [interest](/usc/26/856.md?p=f-1). For purposes of this subparagraph, the actuarial [interest](/usc/26/856.md?p=f-1) of each beneficiary shall be determined by assuming the maximum exercise of discretion by the fiduciary in favor of such beneficiary and the maximum use of such [stock](/usc/26/1504.md?p=a-4) to satisfy his rights as a beneficiary.
    - (B) [Stock](/usc/26/1504.md?p=a-4) owned, directly or [indirectly](/usc/26/101.md?p=a-3-B), by or for any portion of a trust of which a person is considered the owner under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners) shall be considered as owned by such person.
    - (C) This paragraph shall not apply to [stock](/usc/26/1504.md?p=a-4) owned by any [employees](/usc/26/430.md?p=c-7-D-vi)’ trust described in [section 401(a)](/usc/26/401.md?p=a) which is exempt from tax under [section 501(a)](/usc/26/501.md?p=a).
  - (4) **Attribution from corporations—** [Stock](/usc/26/1504.md?p=a-4) owned, directly or [indirectly](/usc/26/101.md?p=a-3-B), by or for a corporation shall be considered as owned by any person who owns (within the meaning of [subsection (d)](#d)) 5 percent or more in [value](/usc/26/851.md?p=c-4) of its [stock](/usc/26/1504.md?p=a-4) in that proportion which the [value](/usc/26/851.md?p=c-4) of the [stock](/usc/26/1504.md?p=a-4) which such person so owns bears to the [value](/usc/26/851.md?p=c-4) of all the [stock](/usc/26/1504.md?p=a-4) in such corporation.
  - (5) **Spouse—** An individual shall be considered as owning [stock](/usc/26/1504.md?p=a-4) in a corporation owned, directly or [indirectly](/usc/26/101.md?p=a-3-B), by or for his spouse (other than a spouse who is legally separated from the individual under a decree of divorce whether interlocutory or final, or a decree of separate maintenance), except in the case of a corporation with respect to which each of the following conditions is satisfied for its taxable year—
    - (A) The individual does not, at any time during such taxable year, own directly any [stock](/usc/26/1504.md?p=a-4) in such corporation;
    - (B) The individual is not a director or [employee](/usc/26/430.md?p=c-7-D-vi) and does not participate in the management of such corporation at any time during such taxable year;
    - (C) Not more than 50 percent of such corporation’s gross income for such taxable year was derived from royalties, rents, [dividends](/usc/26/316.md?p=a), [interest](/usc/26/856.md?p=f-1), and annuities; and
    - (D) Such [stock](/usc/26/1504.md?p=a-4) in such corporation is not, at any time during such taxable year, subject to conditions which substantially restrict or limit the spouse’s right to dispose of such [stock](/usc/26/1504.md?p=a-4) and which run in favor of the individual or his children who have not attained the age of 21 years.
  - (6) **Children, grandchildren, parents, and grandparents—**
    - (A) **Minor children—** An individual shall be considered as owning [stock](/usc/26/1504.md?p=a-4) owned, directly or [indirectly](/usc/26/101.md?p=a-3-B), by or for his children who have not attained the age of 21 years, and, if the individual has not attained the age of 21 years, the [stock](/usc/26/1504.md?p=a-4) owned, directly or [indirectly](/usc/26/101.md?p=a-3-B), by or for his parents.
    - (B) **Adult children and grandchildren—** An individual who owns (within the meaning of [subsection (d)(2)](#d-2), but without regard to this subparagraph) more than 50 percent of the total combined voting power of all classes of [stock](/usc/26/1504.md?p=a-4) entitled to vote or more than 50 percent of the total [value](/usc/26/851.md?p=c-4) of shares of all classes of [stock](/usc/26/1504.md?p=a-4) in a corporation shall be considered as owning the [stock](/usc/26/1504.md?p=a-4) in such corporation owned, directly or [indirectly](/usc/26/101.md?p=a-3-B), by or for his parents, grandparents, grandchildren, and children who have attained the age of 21 years.
    - (C) **Adopted child—** For purposes of this section, a legally adopted [child](/usc/26/152.md?p=f-1-A) of an individual shall be treated as a [child](/usc/26/152.md?p=f-1-A) of such individual by blood.
- (f) **Other definitions and rules—**
  - (1) **Employee defined—** For purposes of this section the term “[employee](/usc/26/430.md?p=c-7-D-vi)” has the same meaning such term is given by paragraphs [(1)](/usc/26/3121.md?p=d-1) and [(2)](/usc/26/3121.md?p=d-2) of section 3121(d).
  - (2) **Operating rules—**
    - (A) **In general—** Except as provided in [subparagraph (B)](#f-2-B), [stock](/usc/26/1504.md?p=a-4) constructively owned by a person by reason of the application of paragraph [(1)](#e-1), [(2)](#e-2), [(3)](#e-3), [(4)](#e-4), [(5)](#e-5), or [(6)](#e-6) of subsection (e) shall, for purposes of applying such paragraphs, be treated as actually owned by such person.
    - (B) **Members of family—** [Stock](/usc/26/1504.md?p=a-4) constructively owned by an individual by reason of the application of paragraph [(5)](#e-5) or [(6)](#e-6) of subsection (e) shall not be treated as owned by him for purposes of again applying such paragraphs in order to make another the constructive owner of such [stock](/usc/26/1504.md?p=a-4).
  - (3) **Special rules—** For purposes of this section—
    - (A) If [stock](/usc/26/1504.md?p=a-4) may be considered as owned by a person under [subsection (e)(1)](#e-1) and under any other paragraph of [subsection (e)](#e), it shall be considered as owned by him under [subsection (e)(1)](#e-1).
    - (B) If [stock](/usc/26/1504.md?p=a-4) is owned (within the meaning of [subsection (d)](#d)) by two or more persons, such [stock](/usc/26/1504.md?p=a-4) shall be considered as owned by the person whose ownership of such [stock](/usc/26/1504.md?p=a-4) results in the corporation being a component member of a [controlled group](/usc/26/414.md?p=l-2-D-v). If by reason of the preceding sentence, a corporation would (but for this sentence) become a component member of two [controlled groups](/usc/26/414.md?p=l-2-D-v), it shall be treated as a component member of one [controlled group](/usc/26/414.md?p=l-2-D-v). The [determination](/usc/26/1313.md?p=a) as to the group of which such corporation is a component member shall be made under regulations prescribed by the Secretary which are consistent with the purposes of this part.
    - (C) If [stock](/usc/26/1504.md?p=a-4) is owned by a person within the meaning of [subsection (d)](#d) and such ownership results in the corporation being a component member of a [controlled group](/usc/26/414.md?p=l-2-D-v), such [stock](/usc/26/1504.md?p=a-4) shall not be treated as excluded [stock](/usc/26/1504.md?p=a-4) under [subsection (c)(2)](#c-2), if by reason of treating such [stock](/usc/26/1504.md?p=a-4) as excluded [stock](/usc/26/1504.md?p=a-4) the result is that such corporation is not a component member of a [controlled group of corporations](/usc/26/993.md?p=a-3).
  - (4) **Franchised corporation—** If—
    - (A) a [parent corporation](/usc/26/424.md?p=e) (as defined in [subsection (c)(2)(A)](#c-2-A)), or a common owner (as defined in [subsection (c)(2)(B)](#c-2-B)), of a corporation which is a member of a [controlled group of corporations](/usc/26/993.md?p=a-3) is under a duty (arising out of a written agreement) to sell [stock](/usc/26/1504.md?p=a-4) of such corporation (referred to in this paragraph as “franchised corporation”) which is franchised to sell the products of another member, or the common owner, of such [controlled group](/usc/26/414.md?p=l-2-D-v);
    - (B) such [stock](/usc/26/1504.md?p=a-4) is to be sold to an [employee](/usc/26/430.md?p=c-7-D-vi) (or [employees](/usc/26/430.md?p=c-7-D-vi)) of such franchised corporation pursuant to a bona fide plan designed to eliminate the [stock](/usc/26/1504.md?p=a-4) ownership of the [parent corporation](/usc/26/424.md?p=e) or of the common owner in the franchised corporation;
    - (C) such plan—
      - (i) provides a reasonable selling price for such [stock](/usc/26/1504.md?p=a-4), and
      - (ii) requires that a portion of the [employee](/usc/26/430.md?p=c-7-D-vi)’s share of the profits of such corporation (whether received as [compensation](/usc/26/414.md?p=n-5-C-iii) or as a [dividend](/usc/26/316.md?p=a)) be applied to the [purchase](/usc/26/1361.md?p=e-1-C) of such [stock](/usc/26/1504.md?p=a-4) (or the [purchase](/usc/26/1361.md?p=e-1-C) of notes, [bonds](/usc/26/150.md?p=a-1), debentures or other similar evidence of indebtedness of such franchised corporation held by such [parent corporation](/usc/26/424.md?p=e) or common owner);
    - (D) such [employee](/usc/26/430.md?p=c-7-D-vi) (or [employees](/usc/26/430.md?p=c-7-D-vi)) owns directly more than 20 percent of the total [value](/usc/26/851.md?p=c-4) of shares of all classes of [stock](/usc/26/1504.md?p=a-4) in such franchised corporation;
    - (E) more than 50 percent of the inventory of such franchised corporation is acquired from members of the [controlled group](/usc/26/414.md?p=l-2-D-v), the common owner, or both; and
    - (F) all of the conditions contained in subparagraphs [(A)](#f-4-A), [(B)](#f-4-B), [(C)](#f-4-C), [(D)](#f-4-D), and [(E)](#f-4-E) have been met for one-half (or more) of the number of days preceding the December 31 included within the taxable year (or if the taxable year does not include December 31, the last day of such year) of the franchised corporation,

    then such franchised corporation shall be treated as an excluded member of such group, under [subsection (b)(2)](#b-2), for such taxable year.

  - (5) **Brother-sister controlled group definition for provisions other than this part—**
    - (A) **In general—** Except as specifically provided in an [applicable provision](/usc/26/414.md?p=s-4), [subsection (a)(2)](#a-2) shall be applied to an [applicable provision](/usc/26/414.md?p=s-4) as if it read as follows:
  - “(2) **Brother-sister controlled group—** “Two or more corporations if 5 or fewer persons who are individuals, [estates](/usc/26/1361.md?p=c-3), or trusts own (within the meaning of [subsection (d)(2)](#d-2) [stock](/usc/26/1504.md?p=a-4) possessing—
    - “(A) at least 80 percent of the total combined voting power of all classes of [stock](/usc/26/1504.md?p=a-4) entitled to vote, or at least 80 percent of the total [value](/usc/26/851.md?p=c-4) of shares of all classes of [stock](/usc/26/1504.md?p=a-4), of each corporation, and
    - “(B) more than 50 percent of the total combined voting power of all classes of [stock](/usc/26/1504.md?p=a-4) entitled to vote or more than 50 percent of the total [value](/usc/26/851.md?p=c-4) of shares of all classes of [stock](/usc/26/1504.md?p=a-4) of each corporation, taking into account the [stock](/usc/26/1504.md?p=a-4) ownership of each such person only to the extent such [stock](/usc/26/1504.md?p=a-4) ownership is identical with respect to each such corporation.”
    - (B) **Applicable provision—** For purposes of this paragraph, an [applicable provision](/usc/26/414.md?p=s-4) is any provision of law (other than this part) which incorporates the definition of [controlled group of corporations](/usc/26/993.md?p=a-3) under [subsection (a)](#a).

## Source credit

(Added Pub. L. 88–272, title II, § 235(a), Feb. 26, 1964, 78 Stat. 120; amended Pub. L. 91–172, title IV, § 401(c), (d), Dec. 30, 1969, 83 Stat. 602; Pub. L. 91–373, title I, § 102(b), Aug. 10, 1970, 84 Stat. 696; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 98–369, div. A, title II, § 211(b)(22), July 18, 1984, 98 Stat. 757; Pub. L. 99–514, title X, § 1024(c)(17), Oct. 22, 1986, 100 Stat. 2408; Pub. L. 100–647, title I, § 1018(s)(3)(A), Nov. 10, 1988, 102 Stat. 3587; Pub. L. 108–357, title VIII, § 900(a), (b), Oct. 22, 2004, 118 Stat. 1650.)

## Notes

### Editorial Notes

### Amendments

2004—Subsec. (a)(2). Pub. L. 108–357, § 900(a), substituted “possessing” for “possessing—”, struck out “(B)” before “more than 50 percent of the total combined voting power”, and struck out subpar. (A) which read as follows: “at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of the stock of each corporation, and”.

Subsec. (f)(5). Pub. L. 108–357, § 900(b), added par. (5).

1988—Subsec. (d)(1)(B). Pub. L. 100–647 substituted “paragraphs (1), (2), and (3) of subsection (e)” for “subsection (e)(1)”.

1986—Subsec. (b)(2)(D). Pub. L. 99–514 struck out “or section 821” after “section 801”.

1984—Subsecs. (a)(4), (b)(2)(D). Pub. L. 98–369 substituted “section 801” for “section 802”.

1976—Subsecs. (b)(4), (f)(3)(B). Pub. L. 94–455 struck out “or his delegate” after “Secretary”.

1970—Subsec. (f)(1). Pub. L. 91–373 substituted “by paragraphs (1) and (2) of section 2131(d)” for “in section 3306(i)”.

1969—Subsec. (a)(2). Pub. L. 91–172, § 401(c), redesignated existing provisions with minor changes as par. (A) and added par. (B).

Subsec. (c)(2)(A)(iv). Pub. L. 91–172, § 401(d)(1), added cl. (iv).

Subsec. (c)(2)(B). Pub. L. 91–172, § 401(d)(2), substituted “5 or fewer persons who are individuals, estates, or trusts (referred to in this subparagraph as ‘common owners’) own” for “a person who is an individual, estate, or trust (referred to in this paragraph as ‘common owner’) owns” and in cl. (ii), substituted “any of such common owners”, “any of the common owners” for “such common owner” and “the common owner”, respectively and added cl. (iii).

### Statutory Notes and Related Subsidiaries

### Effective Date of 2004 Amendment

Pub. L. 108–357, title VIII, § 900(c), Oct. 22, 2004, 118 Stat. 1650, provided that: “The amendments made by this section [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [Oct. 22, 2004].”

### Effective Date of 1988 Amendment

Pub. L. 100–647, title I, § 1018(s)(3)(B), Nov. 10, 1988, 102 Stat. 3587, provided that: “The amendment made by subparagraph (A) [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [Nov. 10, 1988].”

### Effective Date of 1986 Amendment

Amendment by Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 1024(e) of Pub. L. 99–514, set out as a note under section 831 of this title.

### Effective Date of 1984 Amendment

Amendment by Pub. L. 98–369 applicable to taxable years beginning after Dec. 31, 1983, see section 215 of Pub. L. 98–369, set out as an Effective Date note under section 801 of this title.

### Effective Date of 1969 Amendment

Amendment by Pub. L. 91–172 applicable with respect to taxable years ending on or after Dec. 31, 1970, see section 401(h)(3) of Pub. L. 91–172, set out as a note under section 1561 of this title.

### Effective Date

Section applicable with respect to taxable years ending after Dec. 31, 1963, see section 235(d) of Pub. L. 88–272, set out as an Effective Date of 1964 Amendment note under section 269 of this title.